How To Profit From China's Rising Nationalism

China business consultant Shaun Rein's latest book, "The War for China's Wallet: Profiting from the New World Order," will be launched on Dec. 4.Shaun Rein

Three years ago, the questions most often asked by multinational clients of Shanghai-headquartered business consultant Shaun Rein were about products and sales. These days, China’s rising nationalism is leading to more discussion about how to invest off of the country’s politics. Rein, the author of “The End of Copycat China” and “The End of Cheap China,” will on Dec. 4 launch a new book that looks at that topic, “The War for China’s Wallet: Profiting from the New World Order.” I recently talked to Rein about the book. Excerpts follow.

Q: What’s the motivation behind your new book?

A: Every topic of conversation now about China seems to be about politics. When I talked with our multinational and hedge fund clients three years ago, they would ask me, “What do Chinese consumers want to buy? What’s the right sales channel? What’s the right product?” Now when I talk to them, they all want to understand the political situation underpinning sales in China.

What do I mean by that? Two things. First, there’s rising nationalism among Chinese consumers. So there’s a lot of fear from Korean clients. They want to know will Chinese ever buy their products again? Will Chinese continue to visit South Korea? Or are they going to switch and go to Thailand or Cambodia, which are viewed as friendlier towards China’s government.

Second, hedge funds and private equity firms want to know how to invest based off of the politics. They want to take advantage of “One Belt, One Road” and other initiatives like that. They want to know when does the state get involved with punishing or rewarding other countries.

So that’s the underlining reason to provide a framework for companies to understand how to profit from China’s rising nationalism, and a more muscular Chinese state.

Q: What’s the framework you have set up?

A: I break countries down into three categories: “hot” partner, “warm” partner and “cold” partner. I argue that a lot of American foreign policy is wrong. They think that China is looking to create allies but is unable to. I don’t see it that way. I view it as China trying to scare, control and reward different countries to move into either the hot or warm categories.

If you are in the hot category, the government tends to give a lot of infrastructure investments and low interest loans, especially to companies that are well connected with the elite. So a country that follows into this is Ethiopia. New openings of flights between China and Ethiopia were announced this month. Another example would be Cambodia, which has gotten a number of low interest infrastructure loans and projects. That contrasts with the U.S., which has been screaming that Cambodia needs to pay it back for loans made in the 1970s during the Vietnam War.

So China is trying to push everybody into that (hot) category or into the warm partner category. The warm category would include countries like the United Kingdom or France. These countries are able to be largely independent of America and largely independent of China. There are really able to benefit well by playing both nations against each other to get benefits. For example, you see Theresa May has gotten closer to China, and China has accelerated putting London as a RMB clearing house for financial services. You see Trudeau has become warmer towards China than his predecessor, and now China is opening up to more Canadian dairy and food products.

The third category is the cold partner category: countries that are losing out to China’s economic growth. These would be countries like Mexico, which should be a great trade partner with China, but their exports to China are barely above what they export to Spain because they just don’t have good political relations with China. They canceled one of the railway projects a couple of years ago. A former ambassador has been very critical of the Chinese government since he left his ambassadorship.

Hedge funds and investment companies need to understand where these countries fall. That’s because you want to invest countercyclically. If South Korea is getting punished by the Chinese government, it’s probably a good time to invest in Korea equities. You can see that China is probably going to dole out economic benefits to the Philippines to bring them from cold partner into the warm partners.

Q: Right, so investors should be looking for cold partners with the ability to upgrade?

A: Yes, or a warm partner country that’s on the downside now but that China’s government is going to try to pull in. You see the government went to, say, Malaysia, and supported the prime minister (when he was losing popularity). When then Philippines President Aquino criticized China, they blocked off mango imports. When Duterte came in and said, “screw off” to America and “we want to get closer to China,” immediately China gives billions of dollars of low interest loans to Philippines and opened up mango imports.

Q: Is there also a specific company context to this? Can you think of any companies that are poised to do well or not?

A: Absolutely. If you are in the warm partner category, you tend to be where Chinese consumers aspire to the most. They tend to like French brands. They like Italian brands in the luxury space. If you fall into the cold partner category, you would be something like Lotte, which had its retail stores shut in China and a joint venture with Hershey was shut. If you are a conglomerate in the cold partner side, you can be a lot trouble.

If you are in the hot partner category, consumers don’t aspire to your products. Who wants to buy Cambodia consumer products? But it could be very good if you’re an infrastructure play, because that’s when the government go out and loan. With “One Belt, One Road,” you can see that Honeywell and General Electric – these kinds of companies -- will do well. Airbus will do better than Boeing because the Chinese government wants to get the Germans to support “One Belt, One Road.”

Q: Where does the U.S. fit in on the hot-cold continuum?

A: The U.S. is cold, but I think that’s natural because there are the two superpowers. Countries and companies need to decide whether they will be closer to China or to the United States. America can never be a warm partner. You have a dual power system, and it’s left to the rest world to decide where to go.

--Follow me on Twitter @rflannerychina

I'm a senior editor and the Shanghai bureau chief of Forbes magazine. Now in my 16th year at Forbes, I compile the Forbes China Rich List and the Taiwan Rich List. I was previously a correspondent for Bloomberg News in Taipei and Shanghai and for the Asian Wall Street Journa...